Managing your finances effectively? With an extra $120 per fortnight, you have choices to consider. Boosting your mortgage repayments can accelerate the payoff process, but increasing Kiwisaver contributions looks like attractive long-term growth. Get personalized insights on prioritizing these strategies for your unique goals and risk tolerance.
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“Having been self-employed for a big chunk of time, my Kiwisaver sat with only minimal deposits for a number of years (enough to get the Govt kick-back), so it’s nowhere near where it needs to be for anything over a ‘no frills’ retirement. I’m now in a salaried job ($115k) and contribute 4%, with my employer putting in 3%. The balance is around $50k and I have about 15-17 years before I plan to retire (I am 53).
My mortgage is $357k on 5.65% (until Sept 2025) and I am overpaying it by $500/fortnight. House is probably valued at $1.2m. I have an emergency fund of $8k (which I am adding to), plus a term deposit of $5k and a small retirement fund through my iwi scheme that I put $30/week in to – the current balance is around $3k. I don’t have any other debt, have a very modest car, don’t go on holidays or eat out. I may or may not inherit some money from my elderly mother, but am not counting on this, as she is in aged care.
My budget is such that I have $120 a fortnight available that I can either add to the mortgage repayments OR top up my Kiwisaver. The calculator on my Fisher Funds Kiwisaver website reckons this would give me a decent sum in retirement.
I know it’s usually the best idea to pay down mortgage debt but isn’t there also an argument for taking advantage of compound interest by putting more into the Kiwisaver? Or should I just add it to my emergency fund for now?”
(Original question on Reddit)
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Your financial situation seems to be well-managed, and it’s great that you’re considering the best use of the extra $120 per fortnight. Let’s break down the options:
Mortgage Repayment:
You are already making additional payments on your mortgage, which is a good strategy to reduce interest and pay off the loan faster.
The interest rate on your mortgage is 5.65%, which is relatively high. By paying it off early, you save on interest
Kiwisaver Contributions:
You are contributing 4% to your Kiwisaver, and your employer is contributing 3%. Increasing your contributions can indeed take advantage of compound interest and help grow your retirement savings.
The calculator on your Fisher Funds Kiwisaver website suggests that increasing your contributions could result in a decent sum in retirement.
Given your situation, here’s a suggested approach:
Emergency Fund:
Ensure your emergency fund is sufficient for your needs. If $8k covers at least three months of living expenses, you might focus on the next steps.
Kiwisaver Contributions:
Consider directing the extra $120 per fortnight towards your Kiwisaver contributions. Given your timeline of 15-17 years before retirement, increasing your contributions now can take advantage of compound interest and potentially boost your retirement savings significantly. The other things to consider is that you have the right strategy for your investment appetite and timeline. A financial adviser can help you with that.
Mortgage Repayment:
Continue with your current mortgage repayment strategy, including the extra $500/fortnight. This helps reduce mortgage interest and accelerates the pay-off process.
Remember, the decision depends on your personal goals and risk tolerance. If you have specific financial goals for retirement and are comfortable with the level of mortgage overpayment, allocating some funds to Kiwisaver could diversify your long-term savings. It might be helpful to consult with a financial adviser who can provide personalized advice based on your individual circumstances.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
